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8 min read

AI's Impact On Software Development VC Opportunities

AI/Artificial Intelligence/Ml/Machine Learning/LLM/NLP/Large Language Models/Natural Language Processing/VC Funding/Venture Capital/Investment/Seed Round/Tech/Technology/Software Development
AI is taking the world by storm and its effects are wide ranging. A new wrinkle has been the percieved effect AI capabilities will have in the software development space for organizations seeking VC funding. Is it even necessary anymore? Let's discuss.
Written by
Jonathan Mitchell
Published on
April 12, 2024

AI's path of disruption has been comprehensive. Rapid innovation and exploration of AI products has left no market untouched. No matter where you look or what you're looking for, AI seems front and center of any discussion. Industry behemoths that have weathered storm after storm are now pondering what the future looks like. Venture capitalists are no different, and that includes investments in software development organizations. Traditional software development used to take excruciatingly long periods of time and hefty budgets to create a final product. Such investment of time and money meant that when a project failed, it failed hard. These tall tasks also served as a monolithic barrier of entry. Start-ups had to live with a shoestring budget or find VC funding to continue development. That may change soon.

The discussion around VC funding in software development has shifted. Realizing AI can amplify and automate capabilities means organizations may not need considerable bankrolls to create an impactful product. In the past, a $2 million seed round would lead to several hires and maybe a runway of a year or year and a half. Nowadays, AI accelerators enable smaller teams to get more done in a shorter time span. This means organizations may change their approach to seeking outside investment. Or they'll make the same amount of funding last longer than it did previously.

So, what does this mean? More R&D, more time to garner traction, and more access to talent that may have gone unnoticed or been too expensive. The fact that OpenAI, Anthropic, and InflectionAI together raised $18 billion shows that investors understand the potential of new AI products. Even if the other side of that coin is that non-AI organizations might seek a different level of investment than they'd needed in the past.

AI as a Direct Competitor to VC Firms

VC firms can, and have been in the past, the primary providers of funding for start-ups. Getting a business off the ground is hard, especially in software development. There is a litany of costs, including tools and capabilities, along with the ordinary expenses of salaries, taxes, etc. However, AI can potentially disrupt this model by becoming a direct competitor to VC firms. AI-powered platforms and crowdfunding platforms are emerging as alternative sources of funding for start-ups, bypassing the need for VC firms. This is not to say the need for VC investment will die entirely. Organizations will always need some extra cash to get a project across the finish line. And getting a huge influx of funding can skyrocket a company’s capabilities. The point here is that what was once seen almost as a necessity for success won't be.

Software development organizations often require a gestation period when they start. Creating, refining, and pushing a product to market has never been a rapid process. There was iteration after iteration to go through, QA testing, market research (if the organization can afford it), and a host of other boxes that must be checked before sending a system into the market. That's why VC money was so integral. It enabled these processes to occur on a timeline that, hopefully, didn't feel rushed for the development team. But, if AI accelerators allow a company to do all of this without the VC funding, or at least less of it, well then an even greater number of organizations have access to a path of success. This reduces the reliance on VC firms for funding and diminishes their role as gatekeepers of investment opportunities. Investment will not disappear. In 2022 alone, software development start-ups garnered $121.2 billion in VC funding. But what organizations seek out that funding and how it's disseminated while organizations grow ever savvier with AI remains to be seen.

Shift Towards AI-backed Start-ups

The ironic flipside to all of this is that while some organizations may no longer need or want the same level of outside investment, AI-based organizations have been raking it in. AI technology has the potential to transform industries across the board. From healthcare to finance, AI has the power to revolutionize processes, increase efficiency, and drive innovation. VC firms know this, and they're not sitting on their hands while others stake out the big fish for themselves.

Investing in AI organizations allows VC firms to participate in the growth and disruption that AI technology brings. Already, the AI revolution has left many industries upside down, not in capability or levels of success, but in the sheer level of change and innovation that's happening every day. Firms understand that AI has the potential to create new markets, improve existing products and services, and generate substantial returns on investment. As a result, VC firms are actively seeking AI organizations that are developing cutting-edge technologies and solutions. The demand for AI-powered solutions is on the rise across industries. As a result, there is a growing market for AI solutions, which has caught the attention of VC firms.

The Future Of VC Opportunities

The future looks about as clear as mud. Honestly, there is no way to know what innovative, revolutionary products will come out over the following weeks, months, and years. How these things will affect VC funding in software development is still to be determined. What is clear is that organizations now have greater access to opportunities than ever before. No matter the niche, with AI tools, businesses can streamline and refine their organization as they see fit. VC funding is a part of that equation, but it may be less integral than before.

Regardless, this is a space to keep an eye on. Even if it is prevalent in media discussions, the utilization of AI is still in its infancy. There's an incredible amount of clutter businesses have to cut through to find products that can help them. As they become more adept and the tools become more accessible, the corresponding effect on VC funding will be significant. It's just a matter of time. What that effect will be? Well, we'll have to wait and find out. Access to success has never before been so democratized. The opportunities are there for organizations both with and without VC funding. Those who execute will ride into this new age of AI capability at the head of the pack. It's an exciting time to be in software development, and this evolution will continue no matter the obstacles. The train has officially left the station; now we must see where it goes.

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